Internationalization at Harley-Davidson

Founded in 1903, Harley-Davidson (Harley) is a U.S. motorcycle manufacturer that offers thirty-five models through a network of nearly 1,500 dealers. Its annual revenues are about $6 billion, mainly from sales of t]he big bikes that made the firm famous. Harley earns three-quarters of its total sales in the United States, where it also manufactures almost all its bikes to ensure quality control.

The firm makes four distinctive groups of models:

¦ Standard. Practical bikes used for low-cost commuting.
¦ Performance. Sleek, sport-style racing bikes built for speed and easy handling.
¦ Custom. Stylized bikes customized to customer tastes.
¦ Touring. Long-distance, large-capacity, comfort bikes that typically include cruise control, stereos, and luggage racks. In the

United States Harley competes primarily in the custom and touring segments, which account for around 85 percent of "heavyweight" sales. Its numerous competitors are all headquartered outside the United States and include Honda, Suzuki, Yamaha, and Kawasaki in Japan, and BMW, Ducati, and Triumph in Europe. New competitors are emerging from China. Harley heavyweight bikes sell for $17,000 or more, which puts them beyond the reach of many buyers. The average age of a Harley buyer in the United States is nearly 50. One key to Harley's success is the Harley Owners Group (HOG), a club of loyal Harley owners with over one million members, including 100,000 in Europe. HOG is an important marketing tool for promoting sales. In the United States brand loyalty is fierce, and switching costs for Harley owners are high. Over time, the firm has created a mystique around its heavyweight bikes that helps drive sales. Indeed, many owners get Harley tattoos.

Threat of Foreign Competitors

Harley faced financial ruin in the 1970s and 1980s. By 1970, Honda, Kawasaki, Suzuki, and Yamaha were selling millions of motorcycles in the United States and specializing in inexpensive, lightweight models. Initially Harley paid little attention to the competition and continued to focus on heavyweight bikes, but the market for lightweights continued to grow. Meanwhile, Harley had begun to experience major problems with the quality of its bikes and poor productivity in its factories. Over time, the firm's image suffered and sales declined sharply. In 1985, despite obtaining tariff protection from the U.S. federal government to combat Japanese imports, Harley continued to falter and nearly went bankrupt.

Revival

Following the arrival of a new CEO, Harley took proactive steps to revive the firm. Ironically, it adopted Japanesestyle management techniques, updating manufacturing methods, improving quality, and expanding model offerings. In its factories, Harley instituted just-in-time inventory systems and total quality management and empowered its production workers. Management increased marketing efforts, improved the dealer network, and undertook various cross-branding ventures. By the 1990s, management had repositioned Harley more strongly in the performance motorcycle market. The improvements paid off in sharp improvements in company image and in sales.

International Expansion

About the same time, Harley management resolved that future success would come from expansion into foreign markets. The firm had established a distribution network and local subsidiary in Japan, and by 2005, it was selling more than 12,000 motorcycles there annually. It continued to sell heavyweight motorcycles in Japan at a price of more than $18,000, substantially more than Honda's standard lightweight model. Harley also made significant inroads in Europe, a vast marketplace that is home to dozens of countries with diverse needs and tastes. Exhibit 1 compares sales of the four Harley models in Europe and the United States in 2006. U.S. customers strongly preferred large custom and touring bikes, while Europeans favored smaller performance and standard models. Compared to U.S. customers' tastes, European preferences are diverse. Freeways in much of Europe have high speed limits that necessitate high-performance bikes. Most Europeans do not relate to Harley's U.S. image of rugged individualism, freedom, and rebellion, and its big bikes are difficult to maneuver in narrow streets and impractical for daily commuting. Fortunately, Harley sells a broad range of bikes that suit diverse European tastes.

To enhance its European presence, Harley launched an overseas branch of the HOG club. Then in 2008, the company purchased the Italian motorcycle firm MV Agusta Group for $109 million. MV Agusta's fast, lightweight models sharply contrast with Harley's heavyweight bikes. The deal gave Harley a line of smaller bikes that appeal to Europeans. In addition to Europe and Japan, Harley management wants to target emerging markets. Brazil, Harley's biggest potential market in Latin America, is fraught with challenges. Initially Brazil's government imposed high import tariffs that doubled the cost of bikes to Brazilian buyers. To address this dilemma, Harley established an assembly plant in Brazil. Local assembly avoids import barriers and reduces costs thanks to the availability of low-cost workers. Management also set its sights on China, home to 1.3 billion people, many of whom ride small motorcycles. While average wages are low, income levels are growing rapidly. Harley is concerned about piracy, however. Some Chinese entrepreneurs are known to counterfeit wellknown foreign branded products, especially those with big price tags. Harley is also considering India, where millions of households have annual incomes over $80,000. Honda, Yamaha, and Kawasaki all have a strong presence there. Nevertheless, management notes that BMW and Suzuki both tried to enter India and failed, mainly due to high trade barriers and other complexities of the Indian market.

Recent Events

Harley's fastest-growing market outside the United States is Canada. But Canada still accounts for just 4 percent of total Harley sales. Harley holds a similar market share in Japan, but the country's economy is in recession, and disposable income has been falling. Australia seems promising, but with a population of twenty million people, the market is limited. In Latin America, Brazil provides less than 2 percent of total sales. Low buying power in Latin America remains a challenge. Interestingly, despite making substantial inroads in foreign markets, Harley's international sales began to decline after 2000, reaching just 16 percent of total sales in 2003. One of the complexities of Europe is that needs and tastes differ on a regional basis. Some buyers prefer Italian styling, which is dominated by Ducati. Others prefer the German styling of BMW.

Environmental Sustainability Challenges

Like automobiles, motorcycles pollute the natural environment, and Harley is vulnerable to regulatory sanctions because it manufactures very large bikes. Most of Harley's greenhouse gas (GHG) emissions emanate from its manufacturing plants, and management is moving to reduce pollution, as well as energy and water usage, as part of an integrated sustainability strategy. The firm is also addressing climate change by preparing for the transition to a lower-carbon economy. These actions and its recycling program help align Harley's actions with stakeholder expectations and strengthen the brand California and Taiwan have recently imposed rigorous new GHG standards on motorcycles. Japan and various European countries are developing similar new standards aimed at GHG reduction. Harley is attempting to stay ahead of evolving regulations. In 2005, the firm launched a motorcycle recycling program in Japan.

The Future

Beginning in late 2008, the global recession hurt Harley as discretionary income fell around the world. For management, a big question is how best to position the firm given declining demand worldwide. Management believes the keys to sustainable growth will be: (i) a heightened focus on foreign markets; (ii) an appeal to lighter-weight, performance-based markets; (iii) improved and larger dealer networks; and (iv) strategic control of distribution. Harley also needs to balance production and sales for domestic and international markets. As the U.S. market slows, Harley's revenues are suffering. To diversify its revenue streams and reduce its dependence on U.S. sales, Harley wants to increase its international business. Its CEO believes the ideal sales mix is 60 percent in the United States and 40 percent internationally, but the company is struggling to achieve this goal.
Reflective Thinking Skills, Analytic Skills, Ethical Understanding and Reasoning Abilities

Case Questions

1. What is the nature of the international business environments Harley faces? What types of risks does the firm face?

2. How can Harley benefit from expanding abroad? What types of advantages can the firm obtain? What advantages acquired abroad can help Harley improve its performance in its home market?

3. How can Harley effectively compete with rivals from Japan and Europe? What strategies should management apply to grow the firm's sales in those regions?

4. Competitors such as Lifan and Zongshen are beginning to emerge from China, where they enjoy competitive advantages like low-cost labor and extensive experience with emerging markets. How can Harley compete against such firms? Should Harley more aggressively pursue emerging markets such as Brazil, China, and India? If so, what strategies will help it succeed in those markets?

5. Evaluate Harley's environmental sustainability initiatives in the evolving regulatory environment on global greenhouse gas. What advantages does Harley gain by attempting to produce environmentally safe and sustainable products?